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Receivables PowerPoint PPT Presentation

Receivables Chapter 9 Receivables Accounts receivable Notes receivable Design internal controls for receivables. Objective 1 Establishing Internal Control What are some controls over accounts receivable? Control over mail receipts Approval for write-off Separation of duties

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Receivables

Chapter 9


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Receivables

Accountsreceivable

Notes receivable


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Design internal controls

for receivables.

Objective 1


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Establishing Internal Control

  • What are some controls over accounts receivable?

Control over

mail receipts

Approval for

write-off

Separation

of duties


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Use the allowance method

to account for uncollectibles

and estimate uncollectibles

by the percent of sales

and aging approaches.

Objective 2


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The Credit Department

  • Companies grant credit to customers in order to increase sales.

  • The credit department evaluates customers who apply for credit cards.


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Uncollectible Accounts Expense

Allowance method

Directwrite-off method


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Methods for Estimating Uncollectible Expense

Percentage of Sales

Aging of Receivables


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Percentage of Sales

  • This is also called the income statement approach.

  • It is based on prior experience of the business.

  • It is computed as a percentage of creditsales.

  • It ignores the current balance of the allowance account.

  • The percentage used is adjusted as needed to reflect collection experience.


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Percentage of Sales Example

  • The credit department of Ana’s Boutique estimates (based on prior experience) that 1% of net credit sales are uncollectible.

  • Net credit sales for the year just ended were $500,000.

  • What is the adjusting entry?

  • $500,000 × 1% = $5,000


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Percentage of Sales Example

Dec 31, 20xx

Uncollectible Account Expense 5,000

Allowance for UncollectibleAccounts 5,000

Recorded expense for the year


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Percentage of Sales Example

What is the effect of this adjusting entry?

Decrease in

Net Income

Decrease in net

Accounts Receivable


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Aging of Accounts Receivable

  • This approach is also called the balance sheetapproachbecause it focuses on accounts receivable.

  • Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.


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Aging of Receivables Example

  • Assume that International Hospital’s past collection experience indicates the following:

  • Length of time% uncollectible 1-30 days2.0 31-60 days3.0 61-90 days5.0 90 + days8.0


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LengthAmount%

1-30$1,900,0002$ 38,000

31-60 1,000,0003 30,000

61-90 700,0005 35,000

90 + 500,0008 40,000

Total$4,100,000$143,000

Aging of Receivables Example

Accounts

Receivable

Allowance for

Uncollectible Accounts


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Aging of Receivables Example

  • The allowance account is adjusted to this $143,000 balance:

  • Assume that the account currently has a credit balance of $100,000.

  • What is the adjustment?


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Aging of Receivables

Uncollectible Account

Expense 43,000

Allowance for Uncollectible

Accounts 43,000

To record allowance for uncollectibles

What if the account had a

debit balance of $1,000?


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Allowance for Uncollectible

Adjustment

1,000144,000

Adjusted balance143,000

Aging of Receivables


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Comparing the Percentage of Sales and Aging Methods

Allowance Method

Percent of Sales Method

Aging of Accounts Receivable Method

Adjusts Allowance for

Uncollectible Accounts

Adjusts Allowance for

Uncollectible Accounts

BY

TO

Amount of

Amount of

UNCOLLECTIBLE

ACCOUNT EXPENSE

UNCOLLECTIBLE

ACCOUNTS RECEIVABLE


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Writing OffUncollectible Accounts

  • What happens when it becomes apparent that an account will not be collected?

  • It must be written off.

  • How?

  • Debit Allowance for Uncollectible Accounts.

  • Credit Accounts Receivable.


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Recoveries

  • How is the collection of a previously written- off account recorded?

  • Debit Accounts Receivable (to reinstate the account).

  • Credit Allowance for Uncollectible Accounts.

  • Debit Cash.

  • Credit Accounts Receivable (to record the collection).


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Use the direct write-off method

to account for uncollectibles.

Objective 3


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Direct Write-Off Method

  • Using this method, an account is written off only when it becomes uncollectible.

  • No allowance account is created.

  • This method is simple to use.

  • The balance sheet is overstated.

  • The income statement is understated.


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Credit Card and Bankcard Sales

  • These save retailers the cost of a credit department.

  • The retailer is required to pay a fee (called a discount) for usage.


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Credit Card and Bankcard Sales

  • How would Ana’s Boutique record a $100 credit card sale with a 2% service charge?

Accounts Receivable (credit card)98

Credit Card Discount 2

Sales Revenue100

To record a credit card sale of $100

less a 2% service charge fee


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Debit Card Sales

Using a debit card is like

paying with cash.


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Notes Receivable: an Overview

  • A note receivable may arise from a sale or may be given in settlement of an account receivable.

  • The maker pays the payee the maturity value.

  • The maturity value includes principal plus interest.


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Promissory Note

$10,000.00 Nov. 30, 2004

For value received, I promise to pay to the order of

POPULAR BANK

HOUSTON, TEXAS

TEN THOUSAND AND NO/100…………DOLLARS

ON FEBRUARY 28, 2005

Plus interest at the annual rate of 10 percent.

__________

Notes Receivable: an Overview

Payee


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Promissory Note

$10,000.00 Nov. 30, 20x4

For value received, I promise to pay to the order of

POPULAR BANK

HOUSTON, TEXAS

TEN THOUSAND AND NO/100…………DOLLARS

ON FEBRUARY 28, 20x5

Plus interest at the annual rate of 10 percent.

__________

Notes Receivable: an Overview

Principal


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Promissory Note

$10,000.00 Nov. 30, 20x4

For value received, I promise to pay to the order of

POPULAR BANK

HOUSTON, TEXAS

TEN THOUSAND AND NO/100…………DOLLARS

ON FEBRUARY 28, 20x5

Plus interest at the annual rate of 10 percent.

__________

Notes Receivable: an Overview

Interest rate

Date of issue


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Promissory Note

$10,000.00 Nov. 30, 20x4

For value received, I promise to pay to the order of

POPULAR BANK

HOUSTON, TEXAS

TEN THOUSAND AND NO/100…………DOLLARS

ON FEBRUARY 28, 20x5

Plus interest at the annual rate of 10 percent.

__________

Notes Receivable: an Overview

Maturitydate


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Identifying a Note’sMaturity Date

  • When the period is given in days…

  • the maturity date is determined by counting the days from the date of issue.

  • The date the note was issued is omitted.

  • The maturity date is counted.


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Computing Interest on a Note

Principal × Rate × Time = Interest

Compute interest on the note due to Popular Bank.

Principal:$10,000

Interest:10%

Time:December 1, 20x4, to February 28, 20x5

$10,000 × 10% × 90 ÷ 360 = $250


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Account for notes receivable.

Objective 4


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Recording Notes Receivable

  • Assume the accounting period ended December 31.

  • How much interest was earned by the bank as of December 31?

  • $10,000 × 10% × (31 ÷ 360) = $86.11


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Recording Notes Receivable

December 31

Interest Receivable86.11

Interest Revenue86.11

To accrue interest on the note


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Recording Notes Receivable

  • How does the bank record the collection at maturity?

February 28

Cash10,250.00

Note Receivable10,000.00

Interest Receivable 86.11

Interest Revenue 163.89

Record interest on note


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Dishonored Notes Receivable

  • If the maker of the note fails to pay the maturity value to the new payee, then the original payee legally must pay the bank the amount due.


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Report receivables

on the balance sheet.

Objective 5


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Reporting Receivables

  • Some companies report a single amount for its current receivables in the body of the balance sheet.

  • They use a note to the financial statements to give more details.


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Use the acid-test ratio and days’

sales in receivables to evaluate

a company.

Objective 6


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Acid-Test Ratio

  • This is a stringent test of liquidity.

  • It measures the entity’s ability to pay its current liabilities immediately.

Acid-test ratio = (Cash + Short-term investments

+ Net current receivables) ÷ Total current liabilities


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Days’ Sales in Receivables

  • It is a measure of the time it takes to collect receivables.

  • A smaller number indicates a quick conversion to cash.


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Days’ Sales in Receivables

One day’s sales = Net sales ÷ 365 days

Days’ sales in average accounts receivable =

Average net accounts receivable ÷ One day’s sales


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End of Chapter 9


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